After the analysts got it wrong in 2014, bonds are now doing what the forecasters were expecting. They are plunging. Byron Wien from Blackstone Group LP says that there are even more losses yet to come.
By the end of 2014, forecasters on Wall Street were predicting that 2015 would be a disastrous year for benchmark treasuries. As Janet Yellen, Federal Reserve Chair was getting ready to raise interest rates for the first time in nearly 10 years. So prognosticators were convinced that yields would then have to rise.
The latest survey of economists by Bloomberg is suggesting that selling isn’t over as yet.
As we already know analysts don’t have such a great track record. Nearly everybody who foresaw a sell off last year as the Fed ended its bond buying program were caught by surprise as the tumbling inflation rate caused Treasuries to go higher. They are however being proved correct this time around, as Treasuries plunged 2.2% since the beginning of April. This is based on data compiled by Bloomberg. But German 10 year yields have risen from 0.72% from 0.05% last month.
John Gorman from Nomura Holdings Inc, Tokyo who are one of the 22 primary dealers that trade directly with the Fed said “Yields are going to go higher. People are coming to terms with the fact that the Fed is going to raise sometime toward end of this year. The economy is in an upward trend.”
As for Benchmark US 10 year yields these have only changed a little going to 2.29% according to Bloomberg Bond Trader prices. They have gone up from this years low of 1.64% in January. As for the price of the 2.125% note due in May 2025 was 98 18/32.
At the beginning of 2015 a Bloomberg survey projected that yield would surge to 3% by the end of this year. But economists have now reduced this figure, but they still see it climbing to 2.41%. This is based on responses, with the most recent being given the heaviest weightings.
As the economy continues to improve so the Fed will probably raise borrowing costs in September of this year. This is according to Wien vice chairman of Blackstone who are based in New York. In an interview with Bloomberg this week he also said “Interest rates are going up, and I’ve thought that for a long time, I don’t think they’re going up a lot.”
The surge in yields such as those underway at present is cause for bondholders to give thanks on their investments make interest payments. Were US 10 year yields to go up to 2.41% by 31st December as is being projected, then an investor who brought today would break even as the coupon payments offset the drop in price. This data was compiled by the Bloomberg show.